Financing the purchase of a house is likely one of the most significant money decisions you'll make in your life, and the choice is even more significant if the home you're looking to buy comes with a hefty price tag. Traditional conforming loans have limits, but that doesn't have to mean that your options are limited. Securing a jumbo loan in Texas or exploring creative lending techniques may be the solutions that will allow you to purchase the house of your dreams.
What Is a Jumbo Loan?
To understand the definition of a jumbo loan, you first have to know a little something about conforming loans. Conforming loans are those that stay within limits set by the Federal Housing Finance Agency (FHFA). When a loan is conforming, it also adheres to the guidelines set by Fannie Mae and Freddie Mac. These conforming loans are eligible to be securitized, guaranteed, or purchased by the two government-sponsored enterprises.
A jumbo loan, which also goes by the name jumbo mortgage, is a loan that exceeds the amount set by FHFA.
Who Needs a Jumbo Loan?
So what exactly does the FHFA establish as these limits? For most of the continental US, the amount is $484,350 for a single-unit dwelling. If you've recently relocated to Texas from another state, you may be aware that 200 counties in the United States have been designated as highly competitive high-cost areas. These counties have a maximum loan limit of $726,525— 150% of the typical threshold amount. Areas such as Los Angeles, New York City, and Nantucket are a few locations that benefit from a higher limit. Unfortunately, if you're looking for a jumbo loan in Texas, you won't find any increased threshold areas. As of 2019, all Texas counties adhere to the $484,350 limit.
How Does a Jumbo Loan Differ from a Smaller Mortgage?
The first and most obvious difference between a conforming loan and a jumbo loan is the loan amount, but the differences don't stop there. Here are some other ways that jumbo loans differ from smaller, conforming loans.
Interest Rates and Down Payment
Both the interest rates and down payments on jumbo loans have seen changes in recent years. Historically, jumbo loans have seen interest rates half a percent to two percent higher than conforming loans. While the rates of jumbo loans run closer to conforming loan rates nowadays, some lenders may have a higher rate.
Down payment requirements may also differ from conforming loans. In the past, it was a quick rule of thumb that jumbo loans needed down payment of 20%, some as high as 30%. Some institutions may require this high of a down payment, but other lenders will allow smaller ones. Others even have things like downpayment assistance programs.
Remember how Fannie Mae and Freddie Mac don't back jumbo loans? Because of that, financial institutions are a little wary of lending out their monies, especially in large amounts. To help mitigate the risk, financial institutions add stricter qualification requirements to their jumbo products. They want to make sure if they loan the money, the borrower will be able to repay it. With most lenders, you'll need to qualify in the following areas:
- Debt-to-Income (DTI) Ratio. This ratio compares the amount of money that you owe to the money going into your pocket every month. The average jumbo loan lender requires around 36% or less; this is a considerably smaller percentage than conforming loans, which typically require closer to 46% or less.
- Credit Score. Conventional loans only require at least a 620 credit score, but the score required for a jumbo loan is substantially higher. If you're taking out a large sum of money, lenders like to see scores higher than 700. Some even want 720+.
- Liquid Assets. Along with a low DTI ratio and a high credit score, lenders want to see that you have the funds to make mortgage payments if your monthly income flow is interrupted. So even if you make a hefty downpayment, be prepared to prove that you have even more money stockpiled.
How to Get the Money You Need Without a Jumbo Loan
Some buyers shy away at the idea of a jumbo loan. Maybe the interest rate is too high, or perhaps the borrower doesn't qualify under the stricter credit requirements. Whatever the reason, a jumbo loan isn't the only way to get the money that you need to purchase your home.
With a little creative lending, you can have the amount in hand in the form of two conforming loans that add up to what one jumbo loan would be.
Lenders do this with a second mortgage known as a piggyback loan. As the name suggests, the second, smaller loan is taken out at the same time as the first and "piggybacks" on the larger first one. The first loan will be just below the jumbo loan threshold and still be considered conforming. The second loan will be for the remaining amount needed.
Many loans of this type take the form of 80-10-10, which translates to the following:
- 80: The first loan is 80% of the purchase price;
- 10: The second loan is 10% of the purchase price;
- 10: The borrow pays down 10% of the purchase price.
This amount isn't set in stone, and some combinations will look different depending on the home price and other factors.
Getting Your Home Mortgage with a Credit Union
Whether you need a first or second mortgage, taking out your home loan with a credit union comes with several benefits.
For one, credit unions can typically offer their members very competitive loan terms and interest rates. They are also able to be more flexible with their borrow qualification requirements. Because credit unions are typically smaller and more local than large banks, members receive a more personal, one-on-one experience. They can come up with creative ways for you to have the money that you need in hand.
Lastly, you're more likely to have excellent customer service experiences with a credit union. Since they are member-owned, credit unions tend to put members first. This member-first approach goes a long way in the home financing process, which can be tedious and require regular communication with your lender. Friendly, knowledgeable people that want to help customers find solutions can make taking out a home loan a breeze.